Jobs growth stalls and real wages fall

Overall Labour Cost Index wage inflation in the June quarter from a year ago was 1.7 percent, which was exactly equal to Consumer Price Index inflation. Real private sector wages fell 0.5 percent over the year.

In the last set of jobs figures before the election, Statistics New Zealand has reported surprisingly weak jobs growth and still-subdued wage growth in the June quarter.

Unemployment edged lower, but only because of a reduced labour force participation rate, and real private sector wages fell 0.5 percent on an annualised basis.

Employment fell by 4,000 or 0.2 percent during a quarter when economists had expected a rise of 0.7 percent. Private sector ordinary time average hourly earnings, which is one measure the Government and economists look at, rose 0.8 percent for the quarter and was up just 1.2 percent from the same quarter a year ago. Given Consumer Price Index inflation of 1.7 percent in the June quarter, that meant private sector real wages fell 0.5 percent on an annualised basis.

The New Zealand dollar fell half a cent to 74.2 US cents after the result as financial markets priced in the prospect of continued low inflation and interest rates for longer.

ASB's economists shifted their forecast for the first Official Cash Rate hike out to February 2019 from November 2018. The Reserve Bank itself forecast in May that it did not expect to increase the OCR until late 2019 and economists said after the jobs figures that its caution looks increasingly justified, given the subdued wage growth, a softer than expected housing market and a four percent rise in the New Zealand dollar since May. The Reserve Bank's next set of forecasts are due next Thursday.

Statistics New Zealand reported there were 2.535 million people employed during the quarter, down 0.2 percent from the March quarter and down from quarterly growth rates of 1.1 percent and 0.7 percent in the previous two quarters. It was the first quarterly drop in employment since the September quarter of 2015. However, jobs growth over the year was 76,000 or 3.1 percent. Most of the jobs growth over the year happened in Auckland (35,700) and the Waikato (14,200). There was net migration of 72,300 in the year to June, which drove most of the 87,000 increase in the working age population.

Unemployment fell by 3,000 or 0.1 percentage points to 4.8 percent in the June quarter and was down from 5.1 percent a year ago. This was the lowest unemployment rate since the December quarter of 2008. But the fall in the June quarter was largely due to a surprising 0.6 percentage point fall in the participation rate to 70.0 percent. This meant the number of people in the labour force fell by 7,000 and the number not in the workforce rose by 26,000. The working age population rose by 20,000 in the quarter and this was the first quarter since September 2015 that jobs growth was below employment growth.

The number of underutilised people, which includes those who are unemployed and available for a job, unemployed but unavailable for a job, or underemployed, fell 13,000 in the quarter to 327,000 or 11.8 percent of the labour force. The number of 15-24 year olds not in employment, education or training (NEET) fell 12,000 to 84,000 74,000 in the quarter, with the NEET rate falling to 11.1 percent from 12.7 percent.

Average hourly ordinary time ordinary earnings for the combined public and private sectors was 0.6 percent for the quarter and 1.6 percent for the year. However, gross weekly earnings, which include earnings from working more hours and more people working rather than simply hourly wages, rose 1.5 percent to $1.8 billion in the quarter and was up 5.1 percent to $7.07 billion a week over the last year.

Economist reaction

Economists said the softness in employment growth was surprising and the moderate wage growth was in line with forecasts.

"This release reinforces the idea that the RBNZ will be in no rush to raise interest rates any time soon," ASB's Nick Tuffley said.

Economists again said they expected wage inflation to pick up as the economy neared full employment.

"While wage growth is currently subdued, it is expected to increase over the coming year, consistent with growth in economic activity and rising consumer price inflation," said Westpac's Satish Ranchod. "However, the extent of any wage increases may be modest for some time (with the notable exception of some workers in the health care sector, whose earnings will be boosted by the recent wage settlement agreement)," he said.

ANZ's Cameron Bagrie said the Reserve Bank was likely to remain comfortable with its neutral stance after seeing these figures, although he still saw signs of wage inflation that would eventually challenge the picture of dormant inflation.

Bagrie said there were tentative signs of a lift in wages in the June quarter, pointing out the median private sector annual increase in the Labour Cost Index in the quarter was 2.5 percent, while the unadjusted measure rose 3.1 percent on annualised basis.

"We wouldn’t want to overstate things; the signs are only tentative. But we’d expect that as spare resources continue to be used up and the impact of the Government’s aged-care settlement flow through, wage growth should continue to lift modestly off lows, even if secular forces such as technology are acting in the opposite direction," he said.

"With workers increasingly difficult to find, labour demand will naturally slow. And eventually this will manifest in stronger wage growth."